So-called robo-advisors could pose an opportunity, as well as a challenge, to many U.S. wealth management firms, Fitch Ratings says.
The rating agency says that while automated investment advisory services “have emerged as another pressure facing active investment managers”, it also sees this as an opportunity for firms, “particularly given the highly scalable nature of the business.”
Fitch says that firms that have a high dependence on advisors, particularly those that focus on middle-market retail investors — such as Edward Jones, Ameriprise, Raymond James, A.G. Edwards, LPL Financial, and both independent advisors and bank-affiliated, mid-tier advisors — could see client defections to automated services. “If investors are steered towards more commoditized investment products as a result, this could further pressure highly active or tailored investment products, particularly those that are unable to produce differentiated net returns over the long term,” it notes.
Dealers that target more ultra-high net worth clients, such Bank of America Merrill Lynch, Morgan Stanley and Northern Trust, may also feel the effects of the growing presence of automated advisors, it says, but to a lesser degree, as their clients typically require more complex, high-touch services that aren’t easily substituted.
“Investors with lower touch service needs and lower account balances have thus far been the primary strategic focus for automated investing services. This is likely to remain so until there is greater market adoption,” it says. “Self-directed investors in lower brackets of investible assets are an underserved market that can be more efficiently serviced through automated advisory services, in our view.”
To that end, it notes that firms such as Schwab and Vanguard have already established automated (or quasi-automated) investment products that make investment allocation decisions using mostly indexing and ETFs. “These firms are likely to maintain advantages in further development of these services due to their historical focus on direct channel delivery capabilities, cost efficiencies and web-based platforms,” Fitch says.
However, it also suggests that robo-advisors could eventually start to expand their services to wealthier clients, too. “As automated offerings further proliferate, pressure may grow on higher touch advisory services to demonstrate their value proposition and bifurcate their service offerings based on investors’ service needs and net worth.”
Fitch also says that it foresees certain challenges with automated programs, including transparency, customization, and operational risk. It notes that it has yet to be proven how automated models may perform in the face of market corrections or other systemic risks.
On the upside, Fitch says that automated investment programs “appear to be more controllable and easier to maintain relative to building and maintaining a human advisor force.”